Friends Provident (LSE:FP.)
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5 Years : From Oct 2010 to Oct 2015
U.K. insurer Friends Provident Group PLC (FP.LN) Tuesday said it has agreed to be acquired by restructuring firm Resolution Ltd. (RSL.LN) in a GBP1.86 billion deal, effectively ending a contentious takeover battle on the same day as it posted a 38% drop in first-half pretax profit.
The deal is Resolution's first major acquisition in its bid to acquire three insurers in the next two to three years. It was set up to lead consolidation in the U.K. insurance sector, targeting companies that its management thought weren't providing enough value for shareholders. The deal hasn't been easy to achieve, with Resolution forced to sweeten its offer after Friends rejected its initial approaches.
Friends said Resolution will offer 0.9 new Resolution shares for each Friends share. Resolution is also offering a cash option, with up to GBP500 million available for Friends shareholders who would rather cash out.
The deal, wrapped up after several weeks of negotiations, values Friends at about GBP1.86 billion, or 13% higher than its market capitalization at Friday's close of GBP1.64 billion. Friends' shares closed at 70 pence a share Friday.
Resolution raised its share offer after its previous proposals - first 0.8 shares and then 0.82 Resolution shares per Friends share - were rejected by Friends.
"We are delighted to have reached agreement with the board of Friends Provident. We are excited by the potential for our proposed restructuring of the U.K. life assurance and asset management sector and believe the acquisition of Friends Provident is an excellent first step," Resolution Ltd. Chairman Mike Biggs said.
Friends Chairman Adrian Montague said: "The board of Friends Provident is pleased to have secured this attractive transaction for shareholders. The transaction offers shareholders the choice of an attractive premium on exit or the opportunity to be part of Resolution's first financial services restructuring project."
The deal is expected to be completed around end-October, after which Friends Provident will be delisted and the enlarged Resolution Ltd. will be admitted into the FTSE 100, probably in December. At 0946 GMT, Friends shares were up 2.4% at 77 pence, while Resolution was down 3% at 86 pence.
Friends' first-half underlying profit on a European Embedded Value basis was GBP131 million, down from GBP211 million in the same period a year ago and below analysts' forecasts for GBP148 million.
The drop was due to a continued fall in its life and pensions sales as the economic slowdown prompted customers to cut insurance spending.
Its EEV net loss, which factors in the effects of falls in the value of investments, widened to GBP67 million from GBP24 million.
On an IFRS basis, first-half net loss was GBP98 million, worse than the GBP60 million net loss a year earlier.
Friends said that "the outlook for the remainder of 2009 remains challenging given the uncertain pace of recovery in the U.K. economy."
Analysts largely glossed over the earnings results, focusing more on the next possible moves of Resolution.
The main points of the takeover deal have been expected as they were already outlined on Monday by Friends Provident.
Oriel Securities analyst Marcus Barnard said Resolution's story "will become much more interesting as they announce subsequent deals and we are able to gauge what sort of value can be created from cost and outsourcing synergies, asset management synergies and disposals."
Barnard kept his buy rating on Resolution.
Shore Capital analyst Eamonn Flanagan noted that other previously mentioned possible targets by Resolution include Clerical Medical and Scottish Widows, which are both owned by Lloyds Banking Group PLC (LYG).
Others mentioned in the past include Legal & General Group PLC (LGEN.LN), Standard Life PLC (SL.LN), Old Mutual PLC (OML.LN) and Aviva PLC(AV.LN) - all much larger than Friends, and a takeover involving anyone of them would surely make Resolution Ltd. a major player in the U.K. insurer sector.
Panmure Gordon's Barrie Cornes said Friends' results "highlight the strategic challenges that Friends faces as a standalone entity." Cornes said new business contribution in the U.K., down 80% at only GBP3 million, is "falling off the edge of a cliff."
Clive Cowdery, head of Resolution Operations, which manages Resolution Ltd., told a briefing that Resolution Ltd. may be able to buy more than three companies in the next two to three years.
"Could that be more than three companies? Possible. The market is still very fragmented today," Cowdery said.
"Three would give you that kind of blended cash flow and that kind of new business optionality. There could be more, but I don't think it will be less," he said.
Cowdery also said Resolution Ltd. should be able to get more cash needed for its next purchases.
"We remain confident that there is substantial capital that can be attracted into the restructuring of the life sector given its attractive returns as we go into the next phase of the project," he said.
-By Vladimir Guevarra, Dow Jones Newswires, Tel. +44 (0) 2078429486, firstname.lastname@example.org
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